LRAS: The abbreviation of long-run aggregate supply, which is the total (or aggregate) real production of final goods and services available in the domestic economy at a range of price levels, during a period of time in which all prices, especially wages, are flexible, and have achieved their equilibrium levels. Long-run aggregate supply (LRAS) is one of two aggregate supply alternatives, distinguished by the degree of price flexibility; the other is short-run aggregate supply (SRAS).

A curve that graphically represents the relation between marginal factor cost incurred by a monopsony for hiring an input and the quantity of input employed. A profit-maximizing monopsony hires the quantity of input found at the intersection of the marginal factor cost curve and marginal revenue product curve. The marginal factor cost curve for a monopsony with market control is positively sloped and lies above the average factor cost curve.

Monopsony is a market structure with a single buyer or in terms of factor markets, a single employer. This means that monopsony is a price maker with control over the buying side of the market. Market control means monopsony faces a positively-sloped supply curve. To buy a larger quantity, it must pay a higher price.

The marginal factor cost curve reflects the degree of market control held by a firm. For a perfectly competitive firm with no market control, the marginal factor cost curve is a horizontal line. For firms with more market control, especially monopsony, the marginal factor cost curve is positively sloped and lies above the average factor cost curve.

Marginal Factor Cost Curve,Monopsony

The marginal factor cost curve (MFC) for OmniKing Island Resort is displayed in the exhibit to the right. Key to this curve is that OmniKing is a monopsony buyer of workers and thus faces a positively-sloped supply curve. Larger quantities of input can be had only with higher prices.

The vertical axis measures marginal factor cost and the horizontal axis measures the quantity of input (workers). Although quantity on this particular graph stops at 10 workers, it could go higher.

This curve indicates that if OmniKing hires the first worker, then marginal factor cost is $6. Alternatively, if it hires the tenth worker, then marginal factor cost is $24.

For reference, the factor supply curve (and average factor cost curve, AFC) is also presented in the exhibit. The key observation is that the positively-sloped marginal factor cost curve (MFC) lies above the supply curve (AFC) facing OmniKing for hiring labor. The positioning of the marginal factor cost curve above the average factor cost curve reflects the mathematical relation between an average and a marginal.

Although this marginal factor cost curve is based on the employment activity of OmniKing Island Resort, a well-known monopsony firm, it works for any buyer with market control. Monopsonistic competition and oligopsony firms that also face positively-sloped supply curves generate comparable marginal factor cost curves.

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